LOS l: Calculate and explain the use of price multiples in determining terminal value in a multi-stage discounted cash flow (DCF) model.

Q1. Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A)   7.14.

B)   9.00.

C)   6.00.

Q2. A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:

A)   P/E to growth (PEG) approach.

B)   dividend yield approach.

C)   fundamentals approach.

Q3. Industrial Light is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A)   3.75.

B)   7.50.

C)   7.14.

LOS l: Calculate and explain the use of price multiples in determining terminal value in a multi-stage discounted cash flow (DCF) model. fficeffice" />

Q1. Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A)   7.14.

B)   9.00.

C)   6.00.

 Correct answer is C)

P₅/E₅ = (0.40 × 1.05) / (0.12 – 0.05) = 6.00

Q2. A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:

A)   P/E to growth (PEG) approach.

B)   dividend yield approach.

C)   fundamentals approach.

Correct answer is C)

It is common to restate the Gordon growth model price as a multiple of expected future book value per share or earnings per share (EPS).

Q3. Industrial Light is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A)   3.75.

B)   7.50.

C)   7.14.

Correct answer is B)

P₅ / E₅ = (0.50 × 1.05) / (0.12 – 0.05) = 7.50

THK

thanks